Industrial Rents, Sale Prices Continue to Rise Even as Sector Slows
“Demand remains well to the positive side, but it is braking somewhat, particularly among consumer-related businesses.”
The industrial property market in the U.S. appears to be slowing somewhat amid economic uncertainty, but in-place rents on current leases are rising, average sale prices continue to increase, and industrial property values – though lower – are still higher than for most other property classes.
These are the findings of Yardi Matrix’s national industrial report for May, which reflects a cautious environment in the sector.
The report notes that occupier demand and absorption are cooling because of the effect of inflation on consumer spending and recession fears. The e-commerce and brick and mortar retail segments are trying to conserve cash and reduce space needs. “Demand remains well to the positive side, but it is braking somewhat, particularly among consumer-related businesses,” the report says.
Nevertheless, in-place industrial rents rose an average three cents to $7.18 per square foot from March to April, up 7.3% from the previous year. The average rate of new leases signed in the past year through April climbed to $9.58 per square foot, $2.40 more than the average for all leases. Gains were most pronounced in large coastal markets like the Inland Empire, Los Angeles, New Jersey, and Boston.
The national vacancy rate rose 20 basis points from March through April, but industrial occupancy remained “solid” even as record amounts of new supply were delivered with more under construction. Across the country, 616.4 million SF of new industrial space are under construction with 721.9 million SF in the planning stages. Phoenix led the nation, with 57.1 million SF under construction, or 16.3% of current stock. It was followed by Dallas, with 56.3 million SF under construction, or 6.4% of current stock, and 17.6 million SF delivered this year.
The picture is less cheerful for new starts, with only 86.8 million SF beginning construction this year. Some of the blame for this is attributed to tightened bank underwriting standards following recent bank failures. “Construction debt remains somewhat unavailable, as banks are financing relationship customers,” according to the report. “Private equity is taking up some of the slack, but terms and cost are far less favorable for borrowers. That means some projects won’t pencil out or will need more equity to proceed.”
April saw the first increase in warehousing and storage employment in nine months. It is now slightly ahead of the pre-pandemic trendline.
Industrial property sales in the first quarter of 2023 totaled $12.6 billion – well below levels in 2021 and 2022. But the average sales price of industrial property jumped 7.7% from $124 per SF in 2022 to $134 per SF so far this year. “While industrial property values have cooled, they are still better than most other property classes,” the report stated.